Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO_______________
Commission File Number: 333-88829
PENINSULA GAMING COMPANY, LLC/PENINSULA GAMING CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 42-1483875
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3RD STREET ICE HARBOR, PO BOX 1750, DUBUQUE, IOWA 52001-1750
(Address of principal executive offices) (Zip Code)
(563) 583-7005
(Registrant's telephone number including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. Yes X No ____
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
All of the common equity interests of Peninsula Gaming Company, LLC
(the "Company") are held by Peninsula Gaming Partners, LLC, and all of the
common stock of Peninsula Gaming Corp. is held by Peninsula Gaming Company, LLC.
PENINSULA GAMING COMPANY, LLC
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Peninsula Gaming Company, LLC:
Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2003
and December 31, 2002.............................................3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three and Six Months Ended June 30, 2003 and 2002..................4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended June 30, 2003 and 2002............................5
Notes to Condensed Consolidated Financial Statements (Unaudited)........6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk........24
Item 4 - Controls and Procedures...........................................24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.................................................25
Item 2 - Changes in Securities and Use of Proceeds.........................25
Item 3 - Defaults Upon Senior Securities...................................25
Item 4 - Submission of Matters to a Vote of Security Holders...............25
Item 5 - Other Information.................................................25
Item 6 - Exhibits and Reports on Form 8-K..................................25
Signatures....................................................................27
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENINSULA GAMING COMPANY, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30 DECEMBER 31,
------------- -------------
.......... 2003 2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,765,758 $ 10,510,205
Restricted cash - purse settlements 300,537 840,366
Restricted investments 23,922,971
Accounts receivable, less allowance for doubtful accounts
of $57,512 and $45,648, respectively 2,415,468 275,822
Interest receivable 157,239
Inventory 148,243 138,405
Prepaid expenses 614,012 395,056
------------ ------------
Total current assets 40,324,228 12,159,854
------------ ------------
RESTRICTED CASH - RACINO PROJECT 53,922,489
------------
PROPERTY AND EQUIPMENT, NET 17,335,737 18,246,857
------------ ------------
PROPERTY AND EQUIPMENT AT ST. LANDRY PARISH 24,176,485 7,455,885
------------ ------------
OTHER ASSETS:
Deferred financing costs, net of amortization
of $3,258,852 and $3,229,782, respectively 13,323,326 4,064,987
Goodwill and other intangible assets 85,333,198 84,413,263
Deposits 115,301 106,938
------------ ------------
Total other assets 98,771,825 88,585,188
------------ ------------
TOTAL $234,530,764 $126,447,784
============ ============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,687,933 $ 1,960,200
Construction payable - St. Landry Parish 6,498,119 2,376,494
Purse settlement payable 911,667 846,778
Accrued payroll and payroll taxes 1,537,661 1,340,395
Accrued interest 9,958,256 4,763,919
Other accrued expenses 3,237,013 3,345,294
Current maturity - line of credit 600,000 600,000
Notes payable 4,500,000
Term loan payable 8,300,000
Note payable to parent 7,325,000
------------ ------------
Total current liabilities 26,430,649 35,358,080
------------ ------------
LONG-TERM LIABILITIES:
12 1/4% Senior secured notes, net of discount 70,552,775 70,493,155
13% Senior secured notes, net of discount 120,808,479
Line of credit 13,234,301 11,250,000
Capital lease obligations 475,781 475,781
Litigation settlement 800,000 1,200,000
------------ ------------
Total long-term liabilities 205,871,336 83,418,936
------------ ------------
Total liabilities 232,301,985 118,777,016
============ ============
COMMITMENTS AND CONTINGENCIES
PREFERRED MEMBERS' INTEREST, REDEEMABLE 4,000,000 4,000,000
MEMBERS' EQUITY (1,771,221) 3,670,768
------------ ------------
TOTAL $234,530,764 $126,447,784
============ ============
See notes to condensed consolidated financial statements (unaudited).
-3-
PENINSULA GAMING COMPANY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2003 2002
-------------- ------------- ------------ ------------
REVENUES:
Casino $ 13,196,976 $ 12,174,849 $ 24,979,954 $ 23,528,643
Racing 3,728,996 3,651,690 6,344,517 4,912,837
Food and beverage 1,177,712 1,154,471 2,026,538 1,894,559
Other 59,831 31,252 97,246 55,931
Less promotional allowances (710,186) (645,911) (1,364,413) (1,231,874)
-------------- -------------- ------------- -------------
Total net revenues 17,453,329 16,366,351 32,083,842 29,160,096
-------------- -------------- ------------- -------------
EXPENSES:
Casino 5,446,088 5,203,614 10,459,803 10,250,293
Racing 2,944,079 2,773,780 4,844,257 3,737,299
Food and beverage 1,101,127 1,092,551 1,917,864 1,828,080
Boat operations 575,000 567,295 1,142,348 1,151,271
Other 41,189 7,080 44,363 15,278
Selling, general and administrative 2,646,737 2,070,991 4,977,695 3,872,540
Pre-opening expense 190,638 204,921
Depreciation and amortization 829,624 728,210 1,648,640 1,433,442
-------------- -------------- ------------- -------------
Total expenses 13,774,482 12,443,521 25,239,891 22,288,203
-------------- -------------- ------------- -------------
INCOME FROM OPERATIONS 3,678,847 3,922,830 6,843,951 6,871,893
-------------- -------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 212,656 16,105 292,665 31,070
Interest expense (including amortization
and write-off of deferred financing
costs and bond discount of $712,220
and $297,831 for the three months ended
June 30, 2003 and 2002, respectively,
and $1,596,240 and $555,515 for the
six months ended June 30, 2003 and 2002,
respectively) (6,797,433) (2,889,395) (11,829,336) (5,531,624)
Loss on sale of assets (17,421) (104,684)
-------------- -------------- ------------- -------------
Total other expense (6,602,198) (2,873,290) (11,641,355) (5,500,554)
-------------- -------------- ------------- -------------
NET INCOME (LOSS) BEFORE PREFERRED MEMBER
DISTRIBUTIONS
AND MINORITY INTEREST (2,923,351) 1,049,540 (4,797,404) 1,371,339
LESS PREFERRED MEMBER DISTRIBUTIONS (90,000) (93,263) (180,544) (186,525)
LESS MINORITY INTEREST (161,563) (196,144)
-------------- -------------- ------------- -------------
NET INCOME (LOSS) TO COMMON MEMBERS' INTEREST $ (3,013,351) $ 794,714 $ (4,977,948) $ 988,670
============== ============== ============= =============
See notes to condensed consolidated financial statements (unaudited).
-4-
PENINSULA GAMING COMPANY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,977,948) $ 988,670
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 1,648,640 1,433,442
Provision for doubtful accounts 65,933 67,374
Amortization and write-off of deferred financing costs and discount
on notes 1,596,240 555,515
Loss on disposal of assets 104,684
Minority interest share of income 196,144
Changes in operating assets and liabilities:
Restricted cash - purse settlement 539,829 937,510
Receivables (2,362,819) (1,044,611)
Inventory (9,838) (2,513)
Prepaid expenses and other assets (227,934) (297,076)
Accounts payable 1,980,964 817,788
Accrued expenses 4,529,838 4,304,339
------------- -------------
Net cash flows from operating activities 2,887,589 7,956,582
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary, net of cash acquired (13,729,862)
Business acquisition and licensing costs (1,763,486) (769,141)
Racino project development costs (12,160,548) (233,873)
Restricted cash - racino project (53,922,489)
Purchase of restricted investments (23,922,971)
Purchase of property and equipment (1,439,012) (630,170)
Proceeds from sale of property and equipment 384,406
------------- -------------
Net cash flows from investing activities (92,824,100) (15,363,046)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs (9,939,196) (937,500)
Proceeds from senior credit facility 2,284,301 12,000,000
Proceeds from senior secured notes 120,736,000
Principal payments on notes payable (4,500,000)
Principal payments on senior credit facility (8,600,000)
Principal payments on note payable to parent (7,325,000)
Principal payments on long-term debt to related party (18,379)
Member distributions (464,041) (695,953)
------------- -------------
Net cash flows from financing activities 92,192,064 10,348,168
------------- -------------
NET INCREASE IN CASH 2,255,553 2,941,704
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,510,205 7,523,652
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,765,758 $ 10,465,356
============= =============
See notes to condensed consolidated financial statements (unaudited).
-5-
PENINSULA GAMING COMPANY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Peninsula Gaming Company, LLC (the "Company"), a Delaware limited liability
company, owns and operates the Diamond Jo riverboat casino in Dubuque, Iowa, and
is a wholly-owned subsidiary of Peninsula Gaming Partners, LLC, a Delaware
limited liability company ("PGP"). Unless the context requires otherwise,
references to the "Company," "we," "us" or "our" refer to Peninsula Gaming
Company, LLC. The Company has two directly wholly-owned subsidiaries, (i)
Peninsula Gaming Corp., which has no assets or operations and was formed solely
to facilitate the offering of the Company's 12 1/4% Senior Secured Notes due
2006, and (ii) OED Acquisition, LLC, a Delaware limited liability company
("OEDA"), and the parent company of The Old Evangeline Downs, LLC ("OED"), a
Louisiana limited liability company that currently owns and operates a horse
track in Lafayette, Louisiana. The Old Evangeline Downs Capital Corp. is a
wholly-owned subsidiary of OED which has no assets or operations and was formed
solely to facilitate the offering by OED of its 13% Senior Secured Notes due
2010 with Contingent Interest (the "OED Notes").
OED's results of operations and cash flows for the six months ended June 30,
2003 and the period February 15, 2002 (date of acquisition) to June 30, 2002
have been consolidated into the Company's consolidated financial statements.
During the period February 15, 2002 to June 30, 2002, the Company had
substantive control of OED. All intercompany transactions have been eliminated.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of normal recurring entries
unless otherwise disclosed, necessary to present fairly the financial
information of the Company for the interim periods presented and have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The interim results reflected in the financial
statements are not necessarily indicative of results for the full year or other
periods.
The financial statements contained herein should be read in conjunction with the
audited financial statements and accompanying notes to the financial statements
included in the Company's Annual Report on Form 10-K for the period ended
December 31, 2002. Accordingly, footnote disclosure which would substantially
duplicate the disclosure in the audited financial statements has been omitted in
the accompanying unaudited financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS
RESTRICTED INVESTMENTS. As of June 30, 2003, OED had $23,922,971 invested in
government securities with original maturities of greater than 90 days from the
date of initial investment. Proceeds from the sale of these investments at
maturity will be used to help pay the first three payments of fixed interest on
the OED Notes in accordance with the Cash Collateral and Disbursement Agreement.
RESTRICTED CASH - RACINO PROJECT. "Restricted cash - racino project" represents
unused proceeds from the sale of the OED Notes, the use and disbursement of
which are restricted to the design, development, construction, equipping and
opening of the racino in accordance with the terms of a Cash Collateral and
Disbursement Agreement, dated February 25, 2003, among OED, US Bank (as trustee
and disbursement agent) and an independent construction consultant (the "Cash
Collateral and Disbursement Agreement"). As of June 30, 2003, OED had
$48,632,292 in cash equivalents deposited in a construction disbursement
-6-
account, $281,218 in cash equivalents deposited in an interest reserve account
that will be used toward payment of fixed interest on the OED Notes and
$5,008,979 in cash equivalents deposited in a completion reserve account that
will be used to fund potential cost overruns and contingency amounts with
respect to the design, development, construction, equipping and opening of the
racino. The funds deposited in these accounts are invested in securities that
are readily convertible to cash.
PROPERTY AND EQUIPMENT AT ST. LANDRY PARISH. Included in Property and Equipment
at St. Landry Parish as of June 30, 2003 and December 31, 2002 are land and land
acquisition costs associated with the racino project of approximately $6.9 and
$5.4 million, respectively, and architecture fees and construction costs
associated with the design and development of the racino of approximately $17.3
million and $2.1 million, respectively.
CAPITALIZED INTEREST. The Company capitalizes interest costs associated with
debt incurred in connection with the racino project. When debt is not
specifically identified as being incurred in connection with the development of
the racino project, the Company capitalizes interest on amounts expended on the
racino project at the Company's average cost of borrowed money. Capitalization
of interest will cease when the project is substantially complete. The amount
capitalized as of June 30, 2003 and December 31, 2002 was $0.6 million and $0.1
million, respectively.
BUSINESS ACQUISITION AND LICENSING COSTS. As of June 30, 2003, the Company had
recorded approximately $3.8 million on its balance sheet for directly related
legal and other incremental costs associated with the acquisition of OED and
obtaining the relevant gaming licenses to conduct gaming operations associated
with the racino project in Louisiana. These costs are included as a cost of the
acquisition and have been evaluated under SFAS No. 141 "Business Combinations"
and SFAS No. 142 "Goodwill and Other Intangible Assets." Intangible assets of
$28.4 million acquired as part of the OED acquisition were identified and valued
as follows (in millions):
Slot Machine and Electronic Video
Game Licenses $24.6
Tradename $2.5
Horse Racing Licenses $1.3
-----
Total $28.4
-7-
For purposes of the valuations set forth above, each of the identified
intangible assets were treated as having indefinite lives and valued separately.
The methodology employed by an independent valuation specialist to arrive at
such valuations required evaluating the fair market value of the existing horse
racing business on a stand-alone basis without taking into account any right to
obtain slot machine and electronic video game licenses. Such valuation was based
in part upon other transactions in the industry and OED's historical results of
operations. A value was also derived for the tradename using market based
royalty rates. A significant portion of the purchase price is attributable to
the slot machine and electronic video game license rights, which were valued
based upon the market value paid by other operators and upon projected cash
flows from operations. These valuations and related intangible assets are
subject to impairment by, among other things, significant changes in the gaming
tax rates in Louisiana, significant new competition which could substantially
reduce profitability, non-renewal of OED's racing or gaming licenses due to
regulatory matters, changes to OED's tradename or the way OED's tradename is
used in connection with its business and regulatory changes that could adversely
affect OED's business by, for example, limiting or reducing the number of slot
machines or video poker machines that they are permitted to operate.
CONSTRUCTION PAYABLE - ST. LANDRY PARISH. At June 30, 2003 and December 31,
2002, OED had $6.5 million and $2.4 million, respectively, in payables and
accruals related to construction and development costs associated with the
racino project.
REVENUE RECOGNITION. Included in "Off-track betting" revenue are revenues from
video poker devices at the Company's Port Allen OTB. Prior to April 2003, the
Company calculated its video poker purse liability expense based on net video
poker revenues which, historically, were calculated as gross revenues from video
poker gaming taken in, or total amount wagered, net of patron payouts less: (i)
franchise fees payable to the Louisiana Office of State Police and (ii) $116 fee
per machine per month. Fifty percent of the net video poker revenue as
calculated above was payable to the LHBPA to be paid out as purses.
On April 9, 2003, the Louisiana Supreme Court handed down a ruling which defines
net video poker revenues similar to the calculation above except that no
deduction is allowed for the franchise fee prior to the equal division of the
net video poker revenues with the LHBPA. Based on the courts ruling, the Company
now calculates its video poker purse liability expense before deducting for
franchise fees payable to the Louisiana Office of State Police. In an effort to
reduce the impact of the Louisiana Supreme Court ruling on the sharing of video
poker revenues with the LHBPA, the Louisiana Legislature passed legislation
during the 2003 regular session that reduces the percentage used to determine
the amount that licensed establishments must pay to the LHBPA from fifty percent
to twenty percent. This reduction becomes effective on August 15, 2003.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. We periodically evaluate our policies and the estimates
and assumptions related to these policies. We also periodically evaluate the
carrying value of our assets in accordance with generally accepted accounting
principles. We operate in a highly regulated industry and are subject to
regulations that describe and regulate operating and internal control
procedures. The majority of our revenues are in the form of cash, which by its
nature, does not require complex estimates. In addition, we made certain
estimates surrounding our application of purchase accounting related to the
acquisition and the related assignment of costs to goodwill and other intangible
assets.
-8-
In addition, contingencies are accounted for in accordance with SFAS No. 5,
"Accounting for Contingencies." SFAS No. 5 requires that we record an estimated
loss from a loss contingency when information available prior to issuance of our
financial statements indicates that it is probable that a liability has been
incurred at the date of the financial statements and the amount of the loss can
be reasonably estimated. Accounting for contingencies such as legal matters
requires us to use judgment. Many of these legal contingencies can take years to
be resolved. Generally, as the time period increases over which the
uncertainties are resolved, the likelihood of changes to the estimate of the
ultimate outcome increases. However, an adverse outcome could have a material
impact on our financial condition and operating results.
RECENTLY ISSUED ACCOUNTING STANDARDS - In November 2002, the Financial
Accounting Standards Board (FASB) issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 expands the disclosure
requirements related to certain guarantees, including product warranties, and
requires the Company to recognize a liability for the fair value of all
guarantees issued or modified after December 31, 2002. FIN 45 did not impact the
Company's financial position or net income.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The Statement
affects the accounting for certain obligations that a reporting entity can or
must settle by issuing its own equity shares. It is effective for financial
instruments entered into or modified after May 31, 2003 and is effective for the
Company's previously existing financial instruments in the fourth quarter of
2003. Statement No. 150 did not impact the Company's financial position or net
income.
CONSOLIDATIONS--The consolidated financial statements include the financial
information of the Company and its wholly-owned direct and indirect subsidiaries
Peninsula Gaming Corp., OEDA, OED and The Old Evangeline Downs Capital Corp. All
significant intercompany transactions have been eliminated.
RECLASSIFICATIONS--Certain 2002 amounts have been reclassified to conform with
2003 presentation.
3. Property and equipment of the Company and its subsidiaries at June 30,
2003 and December 31, 2002 are summarized as follows:
JUNE 30, DECEMBER 31,
2003 2002
-------------- --------------
Land $ 1,110,000 $ 1,110,000
Buildings and improvements 8,092,467 8,387,134
Riverboats and improvements 8,296,474 8,300,776
Furniture, fixtures and equipment 8,366,103 7,942,095
Computer equipment 1,043,042 962,700
Vehicles 148,615 130,753
Equipment held under capital lease
obligations 704,527 704,527
-------------- --------------
Subtotal 27,761,228 27,537,985
Accumulated depreciation (10,425,491) (9,291,128)
------------- -------------
Property and equipment, net $ 17,335,737 $ 18,246,857
============= =============
-9-
4. DEBT
The debt of the Company and its subsidiaries consists of the following:
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
12 1/4% Senior Secured Notes of the Company
due July 1, 2006, net of discount of
$447,225 and $506,845, respectively,
secured by assets of the Diamond Jo. $ 70,552,775 $ 70,493,155
13% Senior Secured Notes of OED due March 1,
2010 with Contingent Interest, net of
discount of $2,391,521, secured by
certain assets of OED. 120,808,479
Loans under Loan and Security Agreement of
the Company with Wells Fargo Foothill,
Inc. (formerly known as Foothill Capital
Corpora- tion), interest rate at greater
of LIBOR + 3% or Prime + .75%, however,
at no time shall the interest rate be
lower than 8.5% (current rate of 8.5%),
principal payments of $50,000 due
monthly beginning October 2002 through
February 2005, maturing March 12, 2005,
secured by assets of the Diamond Jo. 11,550,000 11,850,000
Loans under Loan and Security Agreement of OED
with Wells Fargo Foothill, Inc.
(formerly known as Foothill Capital
Corporation), interest rate at Prime +
2.50% (current rate of 6.5%), secured by
certain assets of OED. 2,284,301
Term loan under Loan and Security Agreement of
OED with Foothill Capital Corporation,
interest at Prime + 3.75%, however, at
no time shall the interest rate be lower
than 7.5% (current rate of 8.0%),
maturing the earlier of (a) June 30,
2003 or (b) the date on which OED
consummates its financing of the racino
project, secured by substantially all
the assets of OED. This facility was
repaid and terminated with proceeds of
the offering of the OED Notes in
February 2003 8,300,000
Note payable to PGP, issued by OEDA, interest
rate of 7% until January 31, 2003,
thereafter 8% until February 28, 2003,
thereafter 9% until June 30, 2003,
thereafter the greater of 12% or the
fixed rate on the notes expected to be
issued to finance the racino project,
maturing on June 30, 2003. Obligations
under this note were repaid in February
2003 with proceeds of the offering of
the OED Notes. 7,325,000
-10-
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
Note payable to William E. Trotter, II Family
LLC (the "WET2 Note"), interest rate of
7% until June 30, 2003, thereafter the
greater of 12% or the fixed rate on the
notes expected to be issued to finance
the racino project, maturing on June 30,
2003. Obligations under this note were
repaid in February 2003 with proceeds of
the offering of the OED Notes. 4,500,000
------------ -----------
Total debt 205,195,555 102,468,155
------------ -----------
Less current portion (600,000) (20,725,000)
------------ ------------
Total long term debt $204,595,555 $ 81,743,155
============ ============
On July 15, 1999, the Company completed a private placement of $71 million
aggregate principal amount of 12 1/4% Senior Secured Notes due 2006 (the
"Peninsula Notes"). The Peninsula Notes bear interest at a rate of 12 1/4% per
year which is payable semi-annually on January 1 and July 1 of each year. The
Peninsula Notes are secured by all of our current and future tangible and
intangible assets (with the exception of certain excluded assets). OEDA is an
unrestricted subsidiary of the Company under the Peninsula Notes pursuant to the
indenture governing the Peninsula Notes, and therefore does not provide credit
support for such notes. The Peninsula Notes, which mature on July 1, 2006, are
redeemable at the Company's option, in whole or in part at any time or from time
to time, on and after July 1, 2003 at certain specified redemption prices set
forth in the indenture governing the Peninsula Notes. The indenture governing
the Peninsula Notes contains a number of restrictive covenants and agreements,
including covenants that limit the Company's ability to, among other things: (1)
incur more debt; (2) pay dividends, redeem stock or make other distributions;
(3) issue stock of subsidiaries; (4) make investments; (5) create liens; (6)
enter into transactions with affiliates; (7) merge or consolidate; and (8)
transfer or sell assets. The events of default under the indenture include
provisions that are typical of senior debt financings. Upon the occurrence and
continuance of certain events of default, the trustee or the holders of not less
than 25% in aggregate principal amount of outstanding Peninsula Notes may
declare all unpaid principal and accrued interest on all of the Peninsula Notes
to be immediately due and payable. Upon the occurrence of a change of control
(as defined in the indenture), each holder of Peninsula Notes will have the
right to require the Company to purchase all or a portion of such holder's
Peninsula Notes pursuant to the offer described in the indenture at a purchase
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of repurchase.
On February 25, 2003, OED completed the private placement of $123.2 million
aggregate principal amount of OED Notes. The OED Notes bear interest at a rate
of 13% per year which is payable semi-annually on March 1 and September 1 of
each year, beginning September 1, 2003. Contingent interest will accrue on the
OED Notes beginning in the first full fiscal year after the casino begins
operations. The amount of contingent interest will be equal to 5.0% of OED's
cash flow for the applicable period, subject to certain limitations. OED may
defer paying a portion of contingent interest under certain circumstances set
forth in the indenture governing the OED Notes. The Company does not provide
credit support for the OED Notes.
At the end of each six-month period after the casino portion of the racino
begins operations, OED is required under the indenture governing the OED Notes
to offer to purchase the maximum principal amount of OED Notes that may be
purchased, with an amount equal to the sum of (i) 50% of OED's excess cash flow
for such period (if any) and (ii) the then available balance in an excess cash
flow account, which account at any time shall not exceed $10 million. For 45
days following the expiration of each initial excess cash flow offer to
purchase, the holders of the OED Notes have the right to request that OED make
an offer to purchase OED Notes with the funds in the excess cash flow account
subject to certain limitations, including that OED shall not be required to make
more than one offer at any one time.
-11-
All such offers to purchase OED Notes shall be made at 101% of the principal
amount, plus accrued and unpaid interest.
The OED Notes are secured by all of OED's current and future assets (with the
exception of certain excluded assets) including the remaining unused proceeds
from the offering of the OED Notes which have been deposited into OED's
construction disbursement, interest reserve and completion reserve accounts. The
OED Notes, which mature on March 1, 2010, are redeemable at OED's option, in
whole or in part at any time or from time to time, on and after March 1, 2007 at
certain specified redemption prices set forth in the indenture governing the OED
Notes. The indenture governing the OED Notes contains a number of restrictive
covenants and agreements, including covenants that limit the ability of OED and
its subsidiaries to, among other things: (1) pay dividends, redeem stock or make
other distributions or restricted payments; (2) incur indebtedness or issue
preferred shares; (3) make certain investments; (4) create liens; (5) agree to
payment restrictions affecting the subsidiary guarantors; (6) consolidate or
merge; (7) sell or otherwise transfer or dispose of assets, including equity
interests of subsidiaries; (8) enter into transactions with affiliates; (9)
designate subsidiaries as unrestricted subsidiaries; (10) use proceeds of
permitted asset sales and (11) change its line of business. The events of
default under the indenture include provisions that are typical of senior debt
financings. Upon the occurrence and continuance of certain events of default,
the trustee or the holders of not less than 25% in aggregate principal amount of
outstanding OED Notes may declare all unpaid principal and accrued interest on
all of the OED Notes to be immediately due and payable. Upon the occurrence of a
change of control (as defined in the indenture), each holder of OED Notes will
have the right to require OED to purchase all or a portion of such holder's OED
Notes at a purchase price equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of repurchase.
The obligations of the Company under its senior secured credit facility with
Wells Fargo (formerly Foothill Capital Corporation) (the "PGC Credit Facility")
are senior to the Company's obligations under the Peninsula Notes. The PGC
Credit Facility contains, among other things, covenants, representations and
warranties and events of default customary for loans of this type. The most
significant covenants include a minimum EBITDA requirement and the maintenance
of certain financial ratios that limit our ability to make distributions and
incur debt. At June 30, 2003 and December 31, 2002, the Company was in
compliance with all such covenants.
On June 24, 2003, OED entered into a new $15.0 million senior secured credit
facility with Wells Fargo Foothill, Inc. (formerly known as Foothill Capital
Corporation) as lender (the "OED Credit Facility"). OED's obligations under the
OED Credit Facility are secured by a lien on substantially all of its and its
subsidiaries' current and future assets, other than the construction
disbursement, interest reserve, completion reserve and excess cash flow accounts
and certain other excluded assets. Pursuant to the intercreditor agreement
described below, the lien on the collateral securing the OED Credit Facility is
senior to the lien on such collateral securing the OED Notes and the guarantees.
The OED Credit Facility consists of a revolving credit facility which permits
OED to request advances and letters of credit to finance working capital and
other general corporate needs. Under the OED Credit Facility, OED has the
ability to borrow up to $3.0 million at any one time outstanding during the
period before the date that the casino portion of the racino has been completed
and is open for business to the general public and construction costs for the
casino have been paid in full or, if such payments are not yet due on such date,
that sufficient funds remain in the construction disbursement account to satisfy
such payments in full (the "Phase I Completion Date"). For the period after the
Phase I Completion Date but before the second anniversary of the Phase I
Completion Date (the "Second Anniversary"), the total amount of credit that will
be available to OED will be the lesser of $15.0 million and a specified
borrowing base (the "Borrowing Base"). For the purposes of the OED Credit
Facility, the Borrowing Base is the lesser of 30% of the amount of certain costs
incurred by OED in connection with the
-12-
construction of the racino project and 20% of the amount of the distressed-sale
valuation of its and its subsidiaries' operations and assets. After the Second
Anniversary, the total amount of credit that will be available to OED will be
the greater of (i) the aggregate principal amount of all advances outstanding as
of the Second Anniversary and (ii) the lesser of $10.0 million and the Borrowing
Base.
All revolving loans incurred under the OED Credit Facility will mature on June
24, 2006. Prior to the maturity date, funds borrowed under the OED Credit
Facility may be borrowed, repaid and reborrowed, without premium or penalty.
OED's borrowings under the OED Credit Facility will bear interest at a base rate
(a Wells Fargo prime rate) plus a margin of 2.50%. The interest rate payable
under the OED Credit Facility will increase by 2% per annum during the
continuance of an event of default. Under the OED Credit Facility, OED is also
required to pay to the lender a letter of credit fee equal to 2% per annum on
the daily balance of the undrawn amount of all outstanding letters of credit and
to the institution issuing a letter of credit a fronting fee, in each case
payable in arrears on a monthly basis.
The OED Credit Facility contains, among other things, covenants, representations
and warranties and events of default customary for loans of this type. The most
significant covenants include a minimum EBITDA requirement and a maximum capital
expenditure requirement. At June 30, 2003 OED was in compliance with all such
covenants.
In connection with OED entering into the OED Credit Facility and concurrently
with the closing of such credit facility, the trustee under the indenture for
the OED Notes (as secured party) has entered into an intercreditor agreement
with Wells Fargo Foothill, Inc. (formerly known as Foothill Capital Corporation)
as the lender under such credit facility. The intercreditor agreement provides,
among other things, that the lien securing the indebtedness under the OED Credit
Facility is senior to the lien securing the indebtedness under the OED Notes and
the guarantees (except that the construction disbursement, interest reserve,
completion reserve and excess cash flow accounts will only be security for the
notes and the guarantees).
5. COMMITMENTS AND CONTINGENCIES
In October 2002, the Company entered into a charitable giving agreement with an
Iowa non-for-profit organization in which the Company has agreed, subject to
certain contingencies, to give such organization a total contribution of
$450,000. The agreement calls for a payment of $50,000 upon the signing of the
agreement and $50,000 on March 1 of each of the next seven years beginning on
March 1, 2003. The first two payments were made by the Company in October 2002
and March 2003, respectively.
In February 2003, OED entered into two separate purchase agreements to purchase
approximately 106 acres of land, which transactions are subject to the
satisfaction of certain closing conditions on or prior to December 31, 2003. OED
paid deposits aggregating $50,000 in connection with these transactions which
are creditable against the purchase price. OED anticipates funding the unpaid
portions of the aggregate purchase price in these transactions from a
combination of funds available in the construction disbursement account and cash
from operations.
Since OED presently does not have a license to operate video gaming devices at
its Port Allen OTB facility, in March 2003, OED entered into a participation
agreement (the "Participation Agreement") with an unrelated third party to
operate video gaming devices. Under the terms of this agreement, such third
party is allowed to operate 100 video gaming devices at the Port Allen OTB
facility until May 27, 2004, which agreement may be extended by the parties for
an additional one year term. Under such agreement, such third party is entitled
to receive a percentage of the "net location profit" generated by such video
gaming devices. After August 25, 2003, OED has the right to terminate this
agreement upon providing fourteen days prior written notice.
-13-
The Participation Agreement also requires that OED, immediately upon its receipt
of a valid video gaming operators license from the Louisiana Gaming Control
Board, assume all of the operator's payment obligations with respect to the
purchase of the 100 video gaming devices installed at the Port Allen OTB
facility. The assumption of such purchase obligation would require OED to
reimburse the operator with respect to payments made under such purchase
agreement, including a $64,364 down payment, and to assume any unpaid
installments out of the twenty four equal monthly installments of $31,250
required to be paid commencing August 1, 2003.
Under the Company's and PGP's operating agreements, the Company and PGP have
agreed, subject to few exceptions, to indemnify and hold harmless PGP and PGP's
members, as the case may be, from liabilities incurred as a result of their
positions as sole manager of the Company and/or members of PGP.
Neither the Company nor any of its subsidiaries are a party to, and neither the
Company nor any of its subsidiaries' property is the subject of, any pending
legal proceedings other than litigation arising in the normal course of
business. The Company does not believe that adverse determinations in any or all
such other litigation would have a material adverse effect on the financial
condition or results of operations of the Company and its subsidiaries.
6. SEGMENT INFORMATION
Pursuant to the provisions of SFAS 131 "Disclosures About Segments of an
Enterprise and Related Information", the Company has determined that, in
connection with the acquisition of OED, the Company currently operates two
reportable segments: (1) Iowa operations, which comprise the Diamond Jo
riverboat casino in Dubuque, Iowa; and (2) Louisiana operations, which comprise
the racetrack operated by OED in Lafayette, Louisiana.
The accounting policies for each segment are the same as those described in the
"Summary of Significant Accounting Policies" in the notes to the financial
statements included in the Company's Annual Report on Form 10-K for the period
ended December 31, 2002 and in the "Summary of Significant Accounting Policies
and Recent Accounting Pronouncements" above.
The table below presents information about reported segments for each period
presented (in thousands):
NET REVENUES NET REVENUES
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Diamond Jo (1) $ 13,226 $ 12,252 $ 25,080 $ 23,715
Evangeline Downs (2) 4,227 4,114 7,004 5,445
---------- ---------- ---------- ----------
Total $ 17,453 $ 16,366 $ 32,084 $ 29,160
ADJUSTED EBITDA (3) ADJUSTED EBITDA (3)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Diamond Jo (1) $ 4,305 $ 4,032 $ 7,934 $ 7,458
Evangeline Downs (2) 394 619 763 847
---------- ---------- ---------- ----------
Total 4,699 4,651 8,697 8,305
-14-
NET INCOME TO COMMON NET INCOME TO COMMON
MEMBERS' INTEREST MEMBERS' INTEREST
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
----------- ---------- ---------- ----------
Diamond Jo (1) $ 724 $ 633 $ 693 $ 793
Evangeline Downs (2) (3,737) 162 (5,671) 196
----------- ---------- ----------- ----------
Total $ (3,013) $ 795 $ (4,978) $ 989
TOTAL ASSETS
JUNE 30, DECEMBER 31,
2003 2002
---------- ------------
Diamond Jo $ 83,039 $ 83,706
Evangeline Downs 151,492 42,742
---------- ----------
Total $ 234,531 $ 126,448
__________
(1) Reflects results of operations of the Diamond Jo for the six months
ended June 30, 2003 and 2002.
(2) Reflects results of operations of the Evangeline Downs for the six
months ended June 30, 2003 and the period February 15, 2002 (date of
acquisition) to June 30, 2002.
(3) Adjusted EBITDA is defined as net income to common members' interest,
plus racino project pre-opening expenses, depreciation and
amortization, net interest expense, loss on disposal of assets,
preferred member distributions and minority interest. Management
believes that Adjusted EBITDA is useful as a means to evaluate the
Company's ability to service existing debt, to sustain potential future
increases in debt and to satisfy capital requirements. Furthermore,
management uses Adjusted EBITDA to determine the Company's compliance
with key financial covenants under its financing agreements, which,
among other things, impacts the amount of indebtedness the Company is
permitted to incur. In addition, because the Company has historically
provided Adjusted EBITDA to investors, it believes that presenting this
non-GAAP financial measure provides consistency in its financial
reporting. However, Adjusted EBITDA is not intended to represent cash
flows for the period, nor has it been presented as an alternative to
either (a) operating income (as determined by accounting principles
generally accepted in the United States) as an indicator of operating
performance or (b) cash flows from operating, investing and financing
activities (as determined by accounting principles generally accepted
in the United States) as a measure of liquidity. Given that Adjusted
EBITDA is not a measurement determined in accordance with accounting
principles generally accepted in the United States and is thus
susceptible to varying calculations, Adjusted EBITDA may not be
comparable to other similarly titled measures of other companies.
The following table reconciles the Company's Adjusted EBITDA to net
income to common members' interest for each period presented (in
thousands):
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
------- ------- ------- -------
EBITDA $ 4,699 $ 4,651 $ 8,697 $ 8,305
Less:
Racino project pre-opening expenses (190) (205)
Depreciation and amortization (830) (728) (1,649) (1,433)
Diamond Jo interest expense, net (2,723) (2,750) (5,454) (5,319)
Evangeline Downs interest
expense, net (3,862) (123) (6,083) (182)
Loss on disposal of assets (17) (104)
Preferred member distributions (90) (93) (180) (186)
Minority interest (162) (196)
-------- -------- -------- --------
Net income to common members' interest $(3,013) $ 795 $(4,978) $ 989
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the condensed consolidated financial statements and the related notes
thereto appearing elsewhere in this report. Some statements contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations constitute "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, which involve risks and
uncertainties, including the risks and uncertainties discussed below, as well as
other risks set forth in our Annual Report on Form 10-K for the year ended
December 31, 2002. Should these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, our future performance and actual
results of operations may differ materially from those expected or intended.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. We periodically evaluate our policies and the estimates and
assumptions related to such policies. We also periodically evaluate the carrying
value of our assets in accordance with generally accepted accounting principles.
We and our subsidiaries operate in a highly regulated industry and are subject
to regulations that describe and regulate operating and internal control
procedures. The majority of our revenues are in the form of cash, which by its
nature, does not require complex estimations. In addition, we made certain
estimates surrounding our application of purchase accounting related to the
acquisition and the related assignment of costs to goodwill and other intangible
assets.
In addition, contingencies are accounted for in accordance with SFAS
No. 5, "Accounting for Contingencies." SFAS No. 5 requires that we record an
estimated loss from a loss contingency when information available prior to
issuance of our financial statements indicates that it is probable that a
liability has been incurred at the date of the financial statements and the
amount of the loss can be reasonably estimated. Accounting for contingencies
such as legal matters requires us to use judgment. Many of these legal
contingencies can take years to be resolved. Generally, as the time period
increases over which the uncertainties are resolved, the likelihood of changes
to the estimate of the ultimate outcome increases. However, an adverse outcome
could have a material impact on our financial condition and operating results.
RESULTS OF OPERATIONS
The results of operations of the Company discussed below include the
combined results of operations of the Diamond Jo casino in Dubuque, Iowa for the
three and six months ended June 30, 2003 and 2002 and the results of operations
of Evangeline Downs in Lafayette, Louisiana for the three and six months ended
June 30, 2003, the three months ended June 30, 2002 and the period February 15,
2002 through June 30, 2002.
-16-
STATEMENT OF OPERATIONS DATA
DIAMOND JO EVANGELINE DOWNS
THREE MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
2003 2002 2003 2002
------------- --------------- ------------- -------------
REVENUES:
Casino $ 13,196,976 $ 12,174,849
Racing $ 3,728,996 $ 3,651,690
Food and beverage 679,899 691,827 497,813 462,644
Other 59,831 31,252
Less promotional
allowances (710,186) (645,911)
-------------- -------------- -------------- --------------
Net revenues 13,226,520 12,252,017 4,226,809 4,114,334
-------------- -------------- -------------- --------------
EXPENSES:
Casino 5,446,088 5,203,614
Racing 2,944,079 2,773,780
Food and beverage 665,174 699,032 435,953 393,519
Boat operations 575,000 567,295
Other 41,189 7,080
Selling, general and
administrative 2,193,552 1,742,604 453,185 328,387
Pre-opening expense 190,638
Depreciation and
amortization 750,840 692,069 78,784 36,141
-------------- -------------- -------------- --------------
Total expenses 9,671,843 8,911,694 4,102,639 3,531,827
-------------- -------------- -------------- --------------
Income from Operations $ 3,554,677 $ 3,340,323 $ 124,170 $ 582,507
DIAMOND JO EVANGELINE DOWNS
SIX MONTHS PERIOD FEBRUARY 15
SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 15 TO JUNE 30,
2003 2002 2003 2002
------------- -------------- ------------- ------------------
REVENUES:
Casino $ 24,979,954 $ 23,528,643
Racing $ 6,344,517 $ 4,912,837
Food and beverage 1,366,735 1,362,402 659,803 532,157
Other 97,246 55,931
Less promotional
allowances (1,364,413) (1,231,874)
-------------- -------------- ------------- --------------
-17-
DIAMOND JO EVANGELINE DOWNS
SIX MONTHS PERIOD FEBRUARY 15
SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 15 TO JUNE 30,
2003 2002 2003 2002
------------- -------------- ------------- ------------------
Net revenues 25,079,522 23,715,102 7,004,320 5,444,994
EXPENSES:
Casino 10,459,803 10,250,293
Racing 4,844,257 3,737,299
Food and beverage 1,320,659 1,353,497 597,205 474,583
Boat operations 1,142,348 1,151,271
Other 44,363 15,278
Selling, general and
administrative 4,178,070 3,486,886 799,625 385,654
Pre-opening expense 204,921
Depreciation and
amortization 1,502,745 1,365,155 145,895 68,287
-------------- -------------- ------------- --------------
Total expenses 18,647,988 17,622,380 6,591,903 4,665,823
Income from operations $ 6,431,534 $ 6,092,722 $ 412,417 $ 779,171
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Net revenues increased 6.6% to $17.5 million for the three months ended
June 30, 2003 from $16.4 million for the three months ended June 30, 2002. The
majority of this increase is due to an increase in Diamond Jo's slot revenue of
7.6%, or $0.8 million, for the three months ended June 30, 2003 compared to the
three months ended June 30, 2002, primarily due to an increase in coin-in of
5.8% over the same period. This increase in slot volume is largely attributed to
(i) the recent economic development in the Port of Dubuque, where the Diamond Jo
is located, which includes our new outdoor entertainment venue featuring
nationally recognized musicians weekly throughout the summer, the opening of a
new riverwalk and related amenities, the construction of a new riverfront hotel,
which includes an indoor water park, and the National Mississippi River Museum
and Aquarium and (ii) internal factors such as targeted promotions to capitalize
on opportunities related to the Port of Dubuque development noted above as well
as our continued focus on targeted players club promotions and maintenance of
our slot mix, which includes the addition of 55 nickel slot machines at the
Diamond Jo. The remaining increase in net revenues is primarily due to an
increase in table games revenue of 13.7%, or $0.2 million, for the three months
ended June 30, 2003 compared to the three months ended June 30, 2002, primarily
due to a 3.1 percentage point increase in our table game hold percentage over
the same period.
Casino gaming win in the Dubuque market increased 6.3% to $24.1 million
for the three months ended June 30, 2003 from $22.7 million for the three months
ended June 30, 2002. We believe this increase was primarily due to the Company's
ability to capitalize on the recent economic development in the Port of Dubuque,
strategic use of targeted players club promotions and a continued focus on
maintenance of our slot mix as noted above combined with a continued focus by
operators at the Greyhound Park on maintenance of their slot mix during such
period. Our share of the Dubuque market casino gaming win increased to 54.8% for
the three months ended June 30, 2003 from 53.7% for the three months ended June
30, 2002 which we believe is due to our ability to capitalize on the outside
factors noted above. Our casino revenues increased 8.4% to $13.2 million for the
three months ended June 30, 2003 from $12.2 million for the three months ended
June 30,
-18-
2002. This percentage increase is the fourth highest percentage increase in
casino revenues for all thirteen casinos in the State of Iowa as reported to the
Iowa Racing and Gaming Commission for the three months ended June 30, 2003
compared to the three months ended June 30, 2002. This increase is due to a 7.6%
increase in slot revenues and a 13.7% increase in table game revenues as
discussed above. Casino revenues were derived 86.9% from slot machines and 13.1%
from table games for the three months ended June 30, 2003 compared to 87.5% from
slot machines and 12.5% from table games for the three months ended June 30,
2002. The number of gaming positions at the Diamond Jo at June 30, 2003 was 858
compared to 852 at June 30, 2002. This increase is due to the addition of 55
slot machines offset by a decrease in the number of table games positions
resulting from the elimination of five blackjack tables, one caribbean stud
table and one three-card poker table. Consistent with an increase in casino
revenue, our casino win per gaming position per day at the Diamond Jo increased
7.3% to $169.02 for the three months ended June 30, 2003 from $157.57 for the
three months ended June 30, 2002. Admissions to the casinos in the Dubuque
market increased 2.5% to 518,000 for the three months ended June 30, 2003 from
506,000 for the three months ended June 30, 2002. Our share of the Dubuque
market casino admissions remained substantially unchanged at 49.0% for the three
months ended June 30, 2003 and 2002. Our admissions at the Diamond Jo for the
three months ended June 30, 2003 increased to 253,000 from 248,000 for the three
months ended June 30, 2002. For the three months ended June 30, 2003 our casino
win per admission at the Diamond Jo increased 6.2% to $52.10 from $49.07 for the
three months ended June 30, 2002.
Racing revenues at OED remained substantially unchanged at $3.7 million
for the three months ended June 30, 2003 and 2002. Net food and beverage
revenues, other revenues and promotional allowances remained substantially
unchanged at $0.5 million for the three months ended June 30, 2003 and 2002.
Casino operating expenses increased 4.7%, or $0.2 million, to $5.4
million for the three months ended June 30, 2003 from $5.2 million for the three
months ended June 30, 2002 due primarily to an increase in gaming taxes of $0.2
million associated with our increased casino revenues. Racing expenses increased
6.1% to $2.9 million for the three months ended June 30, 2003 from $2.8 million
for the three months ended June 30, 2002 due primarily to (i) an increase in
insurance expense at OED of $63,000, (ii) expenses related to the addition of
100 new video gaming devices at OED's newly renovated OTB in Port Allen,
Louisiana of $57,000 and (iii) an increase in utilities at OED of $43,000 due to
an increase in local utility rates. Food and beverage expenses remained
substantially unchanged at $1.1 million for the three months ended June 30, 2003
and 2002. Boat operation expenses and other expenses were substantially
unchanged at $0.6 million for the three months ended June 30, 2003 and 2002.
Selling, general and administrative expenses increased to $2.6 million
for the three months ended June 30, 2003 from $2.1 million for the three months
ended June 30, 2002. This increase was due to (i) an increase in performance
based bonus expense and management salary expense of $358,000, primarily related
to the improved financial performance of the Diamond Jo over the prior year and
salary adjustments, (ii) an increase in professional fees at OED of
approximately $70,000, (iii) an increase in insurance expense at the Diamond Jo
of $61,000 and (iv) an increase in political contributions at OED of
approximately $46,000. Pre-opening expenses of $0.2 million for the three months
ended June 30, 2003 relate to payroll and other expenses incurred by OED
directly related to start-up activities surrounding the racino project.
Depreciation and amortization expenses increased 13.9% to $0.8 million
for the three months ended June 30, 2003 from $0.7 million for the three months
ended June 30, 2002. This increase is due to property and equipment additions of
approximately $1.7 million over the twelve months ended June 30, 2003, the
majority of which were slot machines and computer equipment with relatively
short depreciable lives. During the first quarter of 2002, the Company performed
a transitional impairment test on goodwill
-19-
in accordance with SFAS 142 and determined the estimated fair value of the
Company exceeded its carrying value as of that date. During the first quarter of
2003, the Company performed its annual impairment test on goodwill in accordance
with SFAS 142 and determined that the estimated fair value of the Company
exceeded its carrying value as of that date. Based on that review, management
determined that there was no impairment of goodwill. Net interest expense
increased 129.2% to $6.6 million for the three months ended June 30, 2003 from
$2.9 million for the three months ended June 30, 2002. This increase is
primarily due to an increase in net interest expense at OED of $3.6 million
primarily associated with interest on the OED Notes.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Net revenues increased 10.0% to $32.1 million for the six months ended
June 30, 2003 from $29.2 million for the six months ended June 30, 2002. The
majority of this increase is due to an increase in racing revenues at OED of
$1.4 million due primarily to the fact that we did not acquire a 50% interest in
OED until February 15, 2002 and, therefore, our results of operations during the
six months ended June 30, 2002 only include four and one-half months of OED
operations compared to a full six months of operations during the six months
ended June 30, 2003, as well as the addition of five live racing days during
2003. The majority of the remaining increase is due to an increase in Diamond
Jo's slot revenue of 5.1%, or $1.1 million, for the six months ended June 30,
2003 compared to the six months ended June 30, 2002, primarily due to an
increase in coin-in of 4.5% over the same period. This increase in slot volume
is largely attributed to (i) the recent economic development in the Port of
Dubuque, where the Diamond Jo is located, which includes our new outdoor
entertainment venue featuring nationally recognized musicians weekly throughout
the summer, the opening of a new riverwalk and related amenities, the
construction of a new riverfront hotel, which includes an indoor water park, and
the National Mississippi River Museum and Aquarium and (ii) internal factors
such as targeted promotions to capitalize on opportunities related to the Port
of Dubuque development noted above as well as our continued focus on targeted
players club promotions and maintenance of our slot mix, which includes the
addition of 55 nickel slot machines at the Diamond Jo. The remaining increase in
net revenues is primarily due to an increase in table games revenue of 13.9%, or
$0.4 million, for the six months ended June 30, 2003 compared to the six months
ended June 30, 2002, primarily due to a 3.4 percentage point increase in our
table game hold percentage over the same period.
Casino gaming win in the Dubuque market increased 5.5% to $45.6 million
for the six months ended June 30, 2003 from $43.2 million for the six months
ended June 30, 2002. We believe this increase was primarily due to the Company's
ability to capitalize on the recent economic development in the Port of Dubuque,
strategic use of targeted players club promotions and a continued focus on
maintenance of our slot mix as noted above combined with a continued focus by
operators at the Greyhound Park on maintenance of their slot mix during such
period. Our share of the Dubuque market casino gaming win increased to 54.8% for
the six months ended June 30, 2003 from 54.4% for the six months ended June 30,
2002. Our casino revenues increased 6.2% to $25.0 million for the six months
ended June 30, 2003 from $23.5 million for the six months ended June 30, 2002.
This percentage increase is the third highest percentage increase in casino
revenues for all thirteen casinos in the State of Iowa as reported to the Iowa
Racing and Gaming Commission for the six months ended June 30, 2003 compared to
the six months ended June 30, 2002. This increase is due to a 5.1% increase in
slot revenues and a 13.9% increase in table game revenues as discussed above.
Casino revenues were derived 87.1% from slot machines and 12.9% from table games
for the six months ended June 30, 2003 compared to 87.9% from slot machines and
12.1% from table games for the six months ended June 30, 2002. Consistent with
an increase in casino revenue, our casino win per gaming position per day at the
Diamond Jo increased 6.6% to $161.40 for the six months ended June 30, 2003 from
$151.42 for the six months ended June 30, 2002. Admissions to the casinos in the
Dubuque market increased 2.2% to 965,000 for the six months ended June 30, 2003
from 944,000 for the six months ended June 30, 2002. For the six months ended
June 30, 2003, our share of the Dubuque market casino
-20-
admissions decreased to 50.0% from 50.4% for the six months ended June 30, 2002.
We believe this decrease is primarily attributable to our targeted use of
marketing dollars directed primarily towards more profitable market segments.
Our admissions at the Diamond Jo for the six months ended June 30, 2003
increased slightly to 483,000 from 476,000 for the six months ended June 30,
2002. For the six months ended June 30, 2003 our casino win per admission at the
Diamond Jo increased 4.7% to $51.74 from $49.44 for the six months ended June
30, 2002.
Racing revenues at OED for the six months ended June 30, 2003 were $6.3
million compared to $4.9 million for the period February 15, 2002 (date of
acquisition) to June 30, 2003. The increase in racing revenues is directly
related to the timing of the acquisition of OED as discussed above. Net food and
beverage revenues, other revenues and promotional allowances remained
substantially unchanged at $0.7 million for the six months ended June 30, 2003
and 2002.
Casino operating expenses increased 2.0%, or 0.2 million, to $10.5
million for the six months ended June 30, 2003 from $10.3 million for the six
months ended June 30, 2002 due primarily to an increase in gaming taxes of $0.4
million associated with our increased casino revenues and an increase in players
club promotions of $0.1 million, offset by a decrease in slot lease expense of
$0.3 million resulting from replacing leased games with games that we own.
Racing expenses increased 29.6% to $4.8 million for the six months ended June
30, 2003 from $3.7 million for the six months ended June 30, 2002 due primarily
to (i) timing of the acquisition of OED in 2002 as discussed above (ii) an
increase in payroll of $94,000 due primarily to holding an additional five live
race days in 2003 compared to 2002, (iii) an increase in insurance expense at
OED of $76,000, (iv) an increase in utilities at OED of $65,000 due to an
increase in local utility rates and usage and (v) expenses related to the
addition of 100 new video gaming devices at OED's newly renovated OTB in Port
Allen, Louisiana of $57,000. Food and beverage expenses increased to $1.9
million for the six months ended June 30, 2003 from $1.8 million for the six
months ended June 30, 2002 due primarily to the timing of the acquisition of OED
as discussed above. Boat operation expenses and other expenses were
substantially unchanged at $1.2 million for the six months ended June 30, 2003
and 2002.
Selling, general and administrative expenses increased to $5.0 million
for the six months ended June 30, 2003 from $3.9 million for the six months
ended June 30, 2002. This increase was due to (i) an increase in selling,
general and administrative expenses at OED of $414,000 which is primarily due to
the timing of the acquisition of OED (as discussed above) and an increase in
professional fees of $125,000, (ii) an increase in performance based bonus
expense and management salary expense of $510,000, primarily related to the
improved financial performance of the Diamond Jo over the prior year and salary
adjustments, (iii) an increase in insurance expense at the Diamond Jo of
$105,000 and (iv) an increase in marketing expenses of approximately $30,000.
Pre-opening expenses of $0.2 million for the six months ended June 30, 2003
relate to payroll and other expenses incurred by OED directly related to
start-up activities surrounding the racino project.
Depreciation and amortization expenses increased 15.0% to $1.6 million
for the six months ended June 30, 2003 from $1.4 million for the six months
ended June 30, 2002. This increase is due to property and equipment additions of
approximately $1.7 million over the twelve months ended June 30, 2003, the
majority of which were slot machines and computer equipment with relatively
short depreciable lives. During the first quarter of 2002, the Company performed
a transitional impairment test on goodwill in accordance with SFAS 142 and
determined the estimated fair value of the Company exceeded its carrying value
as of that date. During the first quarter of 2003, the Company performed its
annual impairment test on goodwill in accordance with SFAS 142 and determined
that the estimated fair value of the Company exceeded its carrying value as of
that date. Based on that review, management determined that there was no
impairment of goodwill. Net interest expense increased 109.7% to $11.5 million
for the six months ended June 30, 2003 from $5.5 million for the six months
ended June 30, 2002. This increase is due to (i)
-21-
an increase in net interest expense at OED of $5.6 million primarily associated
with interest on the OED Notes, the amortization and write-off of deferred
financing costs associated with OED's term loan with Wells Fargo Foothill, Inc.
(formerly Foothill Capital Corporation), the PGP Note and the WET2 Note (all of
which were repaid in February 2003 with the proceeds of the offering of the OED
Notes) and timing of the OED acquisition as discussed above and (ii) interest
associated with our loans under our loan and security agreement with Wells Fargo
Foothill, Inc., $12.0 million of which was drawn down by the Company on February
15, 2002 to consummate the acquisition of OED, resulting in six months of
interest during the six months ended June 30, 2003 compared to only four and
one-half months of interest during the six months ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
On June 24, 2003, OED entered into a new $15.0 million senior secured
credit facility with Wells Fargo Foothill, Inc. (formerly known as Foothill
Capital Corporation) as lender (the "OED Credit Facility"). The OED Credit
Facility consists of a revolving credit facility which permits OED to request
advances and letters of credit to finance working capital and other general
corporate needs. All revolving loans incurred under the OED Credit Facility will
mature on June 24, 2006. Prior to the maturity date, funds borrowed under the
OED Credit Facility may be borrowed, repaid and reborrowed, without premium or
penalty. Borrowings under the OED Credit Facility will bear interest at a base
rate (a Wells Fargo prime rate) plus a margin of 2.50%. As of June 30, 2003, we
had borrowings in the amount of $2,284,301 outstanding under the OED Credit
Facility.
CASH FLOWS FROM OPERATING, INVESTING AND FINANCING ACTIVITIES
Our cash balance increased $2.3 million during the six month period
ended June 30, 2003 to $12.8 million from $10.5 million at December 31, 2002.
Cash flows from operating activities of $2.9 million for the six month
period ended June 30, 2003 consisted of a net loss of $5.0 million increased by
non-cash charges of $3.4 million, principally depreciation and amortization,
write-off and amortization of deferred financing costs and an increase in
working capital of $4.5 million. The change in working capital is primarily due
to a net increase in accrued expenses of $4.5 million which is primarily due to
accrued interest of approximately $5.2 million, related to the OED Notes offset
by a litigation settlement payment of $0.4 million related to the HBPA
settlement and approximately a $0.3 million decrease in other accrued expenses.
Other changes in working capital include an increase in accounts payable of $1.9
million, primarily due to money room settlements and signal fees payable to
other tracks and an increase in restricted cash designated for horse racing
purses of $0.5 million, offset by an increase in receivables of $2.4 million due
primarily to money room settlements and signal fees due from other tracks.
Cash flows used in investing activities for the six months ending June
30, 2003 was $92.8 million consisting of (i) an increase in restricted cash -
racino project and restricted investments of $77.8 million related to the
investment of proceeds from the OED Notes into interest bearing cash equivalents
and investments whose distribution is restricted as outlined in the Cash
Collateral and Disbursement Agreement, (ii) approximately $12.2 million for
construction, architecture fees and other development costs associated with the
racino project and the purchase of land at St. Landry Parish (the future site of
the racino project), (iii) approximately $1.8 million in development costs
related to the OED acquisition and OED's racing and gaming licenses and (iv)
cash outflows of approximately $1.4 million used for capital expenditures mainly
related to the purchase of new slot machines, the construction of our concert
area adjacent to the Diamond Jo which hosts weekly concerts throughout the
summer months and the
-22-
renovation of OED's Port Allen OTB to accommodate the installation of 100 video
poker machines. These cash outflows were offset by cash proceeds from the sale
of assets of $0.4 million. We expect additional capital expenditures at the
Diamond Jo and OED (other than the capital expenditures related to the racino
project) to be approximately $0.5 million and $0.1 million, respectively, for
the year ended December 31, 2003.
Cash flows from financing activities for the six months ended June 30,
2003 of $92.2 million reflects the net proceeds from the offering of the OED
Notes of $120.7 million and the proceeds from our draw down under the OED Credit
Facility of $2.3 million. These proceeds were offset by (i) principal payments
to extinguish OED's obligations under OED's term loan with Wells Fargo Foothill,
Inc. (formerly Foothill Capital Corporation), the PGP Note and the WET2 Note
totaling $20.1 million, (ii) deferred financing costs paid of $9.9 million
associated with the OED Notes and the OED Credit Facility, (iii) member
distributions of $0.5 million and (iv) aggregate principal payments on
borrowings under the PGC Credit Facility of $0.3 million. As of June 30, 2003,
the Company has $11.6 million outstanding under the PGC Credit Facility and OED
had $2.3 million outstanding under the OED Credit Facility.
We believe that cash and cash equivalents on-hand and cash generated
from operations at the Company will be sufficient to satisfy our working capital
and capital expenditure requirements, repay borrowings under the PGC Credit
Facility, and satisfy our other current debt service requirements. If cash and
cash equivalents on-hand and cash generated from operations at the Company are
insufficient to meet our obligations, we may have to refinance our debt or sell
some or all of our assets (within the restrictions contained in the indenture
governing the Peninsula Notes) to meet our obligations. In addition, we believe
that OED's cash and cash equivalents on-hand (which includes the remaining net
proceeds from the offering of the OED Notes), available borrowings under the OED
Credit Facility, anticipated furniture, fixtures and equipment financing of up
to $16.0 million and cash generated from operations at OED will be sufficient to
satisfy OED's working capital and current debt service requirements. If OED is
unable to obtain such furniture, fixtures and equipment financing on
commercially reasonable terms or at all or if cash and cash equivalents on-hand
(including the remaining net proceeds from the offering of the OED Notes),
available borrowings under the OED Credit Facility and cash generated from
operations at OED are insufficient to meet its obligations, OED may have to
refinance its debt or sell some or all of its assets (within the restrictions
contained in the indenture governing the OED Notes)to meet its obligations.
-23-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks which are inherent in our
financial instruments which arise from transactions entered into in the normal
course of business. Market risk is the risk of loss from adverse changes in
market prices and interest rates. We do not currently utilize derivative
financial instruments to hedge market risk. We also do not hold or issue
derivative financial instruments for trading purposes.
We are exposed to interest rate risk due to changes in interest rates
with respect to our long-term variable interest rate debt borrowing under our
and OED's senior credit facilities. As of June 30, 2003, the Company and OED had
$11.6 million and $2.3 million, respectively, in borrowings under loan and
security agreements with Wells Fargo Foothill, Inc. (formerly Foothill Capital
Corporation). We have estimated our market risk exposure using sensitivity
analysis. We have defined our market risk exposure as the potential loss in
future earnings and cash flow with respect to interest rate exposure of our
market risk sensitive instruments assuming a hypothetical increase in market
rates of interest of one percentage point. Assuming the Company and OED borrow
the maximum amount allowed under our loan and security agreements with Wells
Fargo Foothill, Inc. (currently $12.1 million and $3.0 million, respectively),
if market rates of interest on our variable rate debt increased by one
percentage point, the estimated consolidated market risk exposure under the
senior credit facilities would be approximately $0.2 million.
We are also exposed to fair value risk due to changes in interest rates
with respect to our long-term fixed interest rate debt borrowing. Our fixed rate
debt instruments are not generally affected by a change in the market rates of
interest, and therefore, such instruments generally do not have an impact on
future earnings. However, future earnings and cash flows may be impacted by
changes in interest rates related to indebtedness incurred to fund repayments as
such fixed rate debt matures. The following table contains information relating
to our fixed rate debt borrowings which are subject to interest rate risk
(dollars in millions):
FIXED INTEREST
DESCRIPTION MATURITY RATE COST FAIR VALUE
- ---------------------- -------------- -------------- ---- ----------
12 1/4% SeniOR
Secured Notes of the
Company July 1, 2006 12 1/4% $71.0 $73.8*
13% Senior Secured
Notes with Contingent
Interest of OED March 1, 2010 13% $123.2 $124.4*
* Represents fair value as of August 6, 2003 based on information provided by an
independent investment banking firm.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Each of the Company's
Chief Executive Officer and Chief Financial Officer, after participating with
the Company's management in an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in the
Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) has concluded that, as of
June 30, 2003, the Company's disclosure controls and procedures were adequate
and effective and designed to ensure that material information relating to the
Company and its subsidiaries would be made known to such officers on a timely
basis.
-24-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries are a party to, and none of the
property of the Company or its subsidiaries is the subject of, any pending legal
proceedings other than litigation arising in the normal course of business. We
do not believe that adverse determinations in any or all such other litigation
would have a material adverse effect on our financial condition or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1A Certificate of Formation of Peninsula Gaming Company, LLC
(incorporated by reference from Exhibit 3.1A to the
Company's Form 10-K for the year ended December 31, 2000,
file number 333-88829).
3.1B Amendment to Certificate of Formation of Peninsula Gaming
Company, LLC (incorporated by reference from Exhibit 3.1B
to the Company's Form 10-K for the year ended December
31, 2000, file number 333-88829).
3.2 Operating Agreement of Peninsula Gaming Company, LLC
(incorporated by reference from Exhibit 3.2 to the
Company's Form 10-K for the year ended December 31, 2000,
file number 333-88829).
3.3 Articles of Incorporation of Peninsula Gaming Corp
(incorporated by reference from Exhibit 3.3 to the
Company's Form 10-K for the year ended December 31, 2000,
file number 333-88829).
3.4 Bylaws of Peninsula Gaming Corp (incorporated by
reference from Exhibit 3.4 to the Company's Form 10-K
for the year ended December 31, 2000, file number
333-88829).
31.1 Certification of M. Brent Stevens, Chief Executive
Officer, pursuant to Section 302 of 31.1 the Sarbanes-
Oxley Act of 2002 and Rule 15d-14 of the Securities
Exchange Act, as amended.
-25-
31.2 Certification of Natalie A. Schramm, Chief Financial
Officer, pursuant to Section 302 of 31.2 the Sarbanes-
Oxley Act of 2002 and Rule 15d-14 of the Securities
Exchange Act, as amended.
(b) REPORTS ON FORM 8-K
None.
-26-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each of the registrants has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Dubuque, State of Iowa on August 14, 2003.
PENINSULA GAMING COMPANY
By: /S/ M. BRENT STEVENS
------------------------
M. Brent Stevens
Chief Executive Officer
(principal executive officer)
By: /S/ GEORGE T. PAPANIER
-------------------------
George T. Papanier
Chief Operating Officer
By: /S/ NATALIE A. SCHRAMM
------------------------
Natalie A. Schramm
Chief Financial Officer
(principal financial officer)
PENINSULA GAMING CORP.
By: /S/ M. BRENT STEVENS
--------------------------
M. Brent Stevens
President and Treasurer
(principal executive officer and
principal financial officer)
-27-